Tipsheet 5
Employer’s Liability –
Indemnity vs Insuring Clause
Client version
May 2009
Updated January 2011
Coverage for claims involving contractual
indemnities under Employer’s Liability
Policies and the limitations of available
policies.
No cover for contractual liabilities
Some liability insurance policies, particularly
Employer’s Liability Insurance, do not cover
claims arising from contractual indemnities
given by the insured. Usually this is due to the
limitations of the insuring clause in the policy.
When contracting with other parties, employers
often give an indemnity or ‘hold harmless’ for
injuries involving their own employees. They
generally expect their Employer’s Liability
Insurance to indemnify them for all types of
compensation claims involving an injured
employee (other than workers compensation).
Example: An employee of a crane hire
business is injured while working on a building
contractor’s site due to the negligence of his
employer or the building contractor. The
employee can claim workers compensation
and can also make a common law negligence
claim against both his employer and the
building contractor.
What are the limitations?
Some Employer’s Liability Insurance only
covers the employer for:
•
Personal injury/compensation claims
brought by their employees; or
•
Claims for contribution brought by a third
party - but only for the employer’s
common law liability to compensate the
injured employee (eg the employer’s
share of legal responsibility for the
accident as determined by the courts).
Unless the indemnity clause in a contract is
‘aligned’ with the cover provided by the policy,
the policy may not cover a claim brought by a
third party against the employer under the
contractual indemnity clause.
Principal’s liability to an injured worker is not
always covered by employer’s liability
i
insurance.
Contractors are not covered by employer’s
liability insurance ii nor are a contractor’s
employees. Contractors should maintain their
own public liability and workers compensation/
Employer’s Liability Insurance to cover
property damage and personal injury claims.
Example: A crane hire business hires a crane
and an operator to a building contractor. The
hire contract contains the following indemnity
clause:
“The (crane hire business) will indemnify the
(building contractor) for any loss, liability, suits,
actions, damages or expenses incurred by the
contractor and arising from personal injury or
property damage suffered by any person,
including an employee, while the (crane hire
business) and its employees are present on
the (building contractor’s) site”.
If the policy only covers compensation claims
brought by the crane hire business’
employees, it wouldn’t cover any claims made
by the building contractor against the crane
hire business. This means that the crane hire
business will be ‘uninsured’ for its contractual
liability to the building contractor.
Disclaimer
This Tipsheet contains general information about contractual liability issues. It is not tailored to your individual
circumstances and is not a substitute for obtaining specific insurance and legal advice about the contractual liability
issues that arise in your business.
Examples of insuring clauses
The words of the insuring clause can make a
big difference to whether a policy will cover a
contractual indemnity claim.
It is important to read the insuring clauses and
exclusions together to fully understand the
extent of the cover provided. Where
Employer’s Liability Insurance is provided with
a workers’ compensation policy, the insurance
benefit for common law liability is usually
limited to employees. The insuring clause for
Employer’s Liability Insurance or common law
liability in a workers’ compensation policy can
differ from state to state and from insurer to
iii
insurer.
Example: Consider three policies with different
“insuring clauses”:
•
Policy A states: “The Insurer will
indemnify the Employer’s liability against
any amount that the Employer becomes
liable to pay independently of the Workers
Compensation Act for any injury to an
employee during or in respect of the
period of insurance”. iv
•
Policy B states: “The Insurer will
indemnify the Employer against all sums
for which, in respect of injury to any
worker employed by him, the Employer
may become legally liable by way of
damages arising under circumstances
creating also, independently of this
Workers Compensation Act, a legal
liability of the Employer to pay damages
in respect of that injury”. v
•
Policy C states: “The Insurer will
indemnify the Employer’s common law
liability for injury suffered by a worker”. vi
Policy C will never respond to an insured’s
contractual liability to a third party - it is limited
to claims for injury brought by the worker.
Policies A and B are more likely to respond
where the employer is liable to third parties
who also compensate the injured worker (eg
the building contractor in the previous
example).
Importance of ‘aligning’ indemnities
with insuring clauses
Even if a policy is broad enough to cover
claims brought by third parties - the policy
might be limited to the insured’s common law
liability (ie only their proportion of the claim) or
it may exclude liability ‘assumed’ under a
contract.
The risk of ‘uninsured’ losses increases for an
employer if the indemnity clause in the contract
is not consistent with proportionate liability
legislation or ‘contributory negligence’
vii
principles .
Example: Policy B provides better cover for the
crane hire business because it has assumed
100% of the liability for property damage or
personal injury to employee under the contract.
This is because Policy B covers “all sums…the
Employer may become legally liable by way of
damages”. This would include a damages
claim brought by the contractor to enforce the
contractual indemnity. As long as Policy B
does not have a ‘contractual liability’ exclusion
or the liability arising from the contract has
been accepted by the insurer (where
necessary), the policy should cover most of the
liability to the employer to the employee and
the contractor.
Policy A is not suitable because it will only
meet the employer’s proportion of the claim as
determined under the Common Law (and a
claim for contribution of that amount made by
the building contractor or its insurers). It
doesn’t cover the contractor’s liability arising
from the indemnity clause in the contract.
If the crane hire business changed the
indemnity clause in the contract to include
‘proportionate liability’ principles (ie the amount
to be indemnified is calculated according to the
extent to which the crane hire business was to
blame for the damage or injury suffered by the
worker), then the policy and the indemnity
clause would be more closely ‘aligned’.
Contact your broker if you would like a
legal review of your contracts.
i
There may be some insurance available under a public liability
policy if the policy is extended to the principal’s liability. Some
workers compensation policies offer principal’s indemnity as an
Disclaimer
This Tipsheet contains general information about contractual liability issues. It is not tailored to your individual
circumstances and is not a substitute for obtaining specific insurance and legal advice about the contractual liability
issues that arise in your business.
extension. Ask your broker for more information or for a copy of our
Tipsheet 7 for more details.
ii
Insurance for common law liability can be limited to employees of
the insured and not contractors (however if the insurance is
provided as an extension to workers compensation it may extend
to contractors). Workers compensation covers contractors if they
come within the definition of a “worker” in the relevant Workers
Compensation Act. If the same definitions are used for the
common law liability extension then there can be cover for
contractors.
iii
In some states, where common law liability is also covered under
a workers’ compensation policy, an employer may be covered for
injuries suffered by contractors. Again this depends on the
definition of “worker” in the Act and whether the same definition is
used in the insurance policy.
iv
Multiplex Constructions Pty Ltd v. Irving: Fugen Holdings Pty Ltd
[2004] NSWCA 346.
v
State Government Insurance Office (Qld) v Brisbane Stevedoring
Pty Ltd (1969) 123 CLR 228.
vi
Nigel Watts v. Fashion Agencies Pty Ltd v. GIO General Ltd
(1995) ANZ Insurance Cases 61-235.
vii
See our Tipsheet 3 for more information about proportionate
liability. Ask your broker for a copy.
Disclaimer
This Tipsheet contains general information about contractual liability issues. It is not tailored to your individual
circumstances and is not a substitute for obtaining specific insurance and legal advice about the contractual liability
issues that arise in your business.